A Chilly June for the U.S. Job Market
Will the U.S. economy continue to shed jobs in June? Most available labor market data are hovering near "weak" levels that imply more losses for the June employment report, scheduled for release July 3.
We at Action Economics expect a decline of 40,000 in the report's headline nonfarm payrolls figure, compared with economists' median forecast of a 58,000 shortfall. The difference is due to our placing more weight on the potential for the end of the American Axle (AXL) strike and a boost to retail activity from rebate checks to provide a temporary floor under the June jobs figures.
The pop in the jobless rate to 5.5% in the May report raises the stakes for this measure in June, when we and most others expect a corrective drop-back to 5.4%, as seasonal May volatility from a large number of students entering the workforce is unwound.
Looking at other components of the report, our estimates of a 33.7-hour average workweek and a 0.3% increase in average hourly earnings also match the median.
Students Boost May Numbers
The mix of payrolls by industry should continue to show weakness led by goods-producing industries, with restrained gains in service sector employment. The end of the American Axle strike on May 22 could add as many as 40,000 to June factory payrolls, though we don't expect to see the full potential impact.
The civilian employment and labor force data have been particularly volatile over the past 10 months, and it will be interesting to see how the June data unfold after the particularly big May swings for both. The May gyrations likely reflected trouble in seasonally adjusting the return of students to the labor force as well as some "catch-up" from the surprisingly encouraging April figures.
The May seasonal effect of students was likely quite large, as workers in the narrow 16-19 age category experienced a seasonally adjusted 260,000 surge in the labor force and a 276,000 surge in the number of unemployed that boosted the unemployment rate to 5.5% from a rate that would have otherwise been reported at 5.2%. Our 5.4% forecast for the June unemployment rate assumes a partial return to trend for labor force and civilian employment figures following these April and May gyrations.
Labor Market Still Weak
Here is a look at some of the labor market indicators that factored into our June forecast:
The payroll figures from the monthly ADP Employment Report continue to notably outperform the comparable private payroll figures, averaging 107,000 higher per month over the last eight months. It wouldn't be surprising if the ADP report for June, scheduled for release July 2, again shows relative strength, though economists would have trouble interpreting a decline as well, given potential for the odd gap between these two gauges to eventually close.
The weekly initial jobless claims data and continuing claims drifted modestly higher in June. The mix implies that the labor market is still in a weakened state relative to where it sat before financial market turmoil began last August, but with little evidence that conditions have weakened substantially over the last few months. Overall, the 50,000-60,000 rise in initial claims since the middle of last year is much smaller than the 100,000-150,000 rise that would be expected in a recession.
The Michigan Consumer Sentiment survey and the Conference Board survey have both pushed to new lows in June. The Michigan survey has dropped to the lowest level since May 1980, while the Conference Board survey has dropped to the lowest level since March 1992. These figures suggest continued downside payroll risk on the month, as confidence declines historically are correlated with a weakening labor market, though soaring prices and headlines trumpeting $4 gasoline and recent declines in the stock market are likely the primary drivers of plummeting confidence in recent months.
Expect Another Modest Drop in Payrolls
The employment components from the various factory sentiment surveys mostly moderated in June from May, though they remain above first-quarter lows. The Empire State employees index came in at 1.2 , from 1.1, while the workweek fell to –2.3, from 1.1. The Philly Fed employees index fell to –6.9, from –1.0, while the workweek fell to –8.9, from –5.6. The Chicago-PMI employment series rose to 46.7, from 41.2. The ISM employment index fell to 43.7, from 45.5.
In total, we expect a U.S. jobs report that reveals another modest drop in payrolls and a fairly flat set of figures for hours worked, alongside some downside correction to the May unemployment rate. The mix will help to set the tone for Fed Chairman Ben Bernanke's semiannual testimony to Congress in July, as will the Monetary Policy Report that was prepared at the June 24-25 FOMC meeting.
Of course, the Fed will receive one more round of monthly job figures before the Aug. 5 FOMC meeting, and these will guide the weight the central bank gives to the labor market's direction in formulating its next statement—and possible policy response.